chapter 1

What is the primary purpose of financial accounting?

To provide useful financial information to external users to help them make informed decisions about resource allocation.

Who are the main users of financial accounting information?

Investors, creditors, government agencies, financial analysts, and regulatory bodies.

What is the main difference between financial accounting and managerial accounting?

Financial accounting focuses on preparing financial statements for external users, while managerial accounting provides internal reports for decision-making.

Name the four primary financial statements.

Balance Sheet, Income Statement, Statement of Cash Flows, & Statement of Shareholders Equity.

What role do capital markets play in financial reporting?

They allow companies to raise funds, and financial reporting provides transparency for assessing risks and returns.

Why do investors provide capital to businesses?

To earn a return on their investment through stock appreciation or dividends.

Define rate of return.

It measures the profitability of an investment, calculated as (Return - Investment)/Investment.

What is the difference between cash basis accounting and accrual basis accounting?

Cash basis records transactions only when cash is exchanged; accrual records revenues and expenses when they are earned or incurred.

What are advantages of accrual accounting over cash accounting?

It provides a more accurate financial picture, recognizes revenues/expenses in the correct period, and is required by GAAP/IFRS.

Which of the following is NOT a primary financial statement?

Statement of Tax Liabilities.

Who is responsible for setting accounting standards in the United States?

FASB (Financial Accounting Standards Board).

What is the main goal of GAAP?

To provide consistency and comparability in financial reporting.

Which organization is responsible for IFRS?

IASB (International Accounting Standards Board).

If an investor purchases stock for $5,000, receives $200 in dividends, and sells the stock for $5,500, what is the investor's rate of return?

14%.

What are the key differences between U.S. GAAP and IFRS?

GAAP is rules-based and detailed; IFRS is principles-based and allows more judgment.

Give an example of a key difference between GAAP and IFRS.

GAAP requires LIFO (Last-In, First-Out) inventory method, but IFRS does not allow LIFO.